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Local Government Review – May 2014

Local Government Review – May 2014

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08/05/2014

Co-operating for mutual benefit

Since the current UK Government was formed in 2010, it has been keen to promote […]

Since the current UK Government was formed in 2010, it has been keen to promote Industrial and Provident Societies (IPSs) and mutuals as part of the diversity of the UK economy. In July 2013 it published a consultation on reforming the law governing IPSs and in December 2013 it published its responses, which included introducing the Co-operative and Community Benefit Societies Bill into Parliament.

Background to IPSs
IPSs were introduced as a legal form by the Industrial and Provident Societies Act 1965. This created two types of co-operatively owned societies: co-operative societies (businesses owned and run by and for their own members) and community benefit societies (businesses operating for the benefit of their community, e.g. housing associations). The IPS structure, currently regulated by the Financial Conduct Authority (FCA), remains popular in the UK, with more than 7,600 IPSs currently active and a membership of over 15 million. They cover a wide range of businesses and industries, from public service mutuals to wind farms, football clubs to credit unions. The Government wants to keep the unique features of the traditional IPS form so that the sector stays focused on serving its members and can contribute further to the success of the UK economy.

Reforms
The consultation proposed bringing into force a number of provisions in the Co-operative and Community Benefit Societies and Credit Unions Act 2010 (the CBSA), which until now have not been implemented. These are:

Section 1 – provides the option to register as ‘Co-operative Societies’ or ‘Community Benefit Societies’ instead of Industrial and Provident Societies – a change requested by the sector as more appropriate and up-to-date

Section 3 – making the Company Directors Disqualification Act 1986 applicable to IPSs

Section 4 – provides the power to apply certain legal provisions relating to companies (see below for what changes the Treasury intends to make under this section)

Section 5 – provides the power to establish a framework for credit unions similar to those applicable to building societies. The Government does not intend to use this power at present but will keep it under review.

Sections 4 and 5 came into force on 1 December 2013 and Section 3 came into force on 6 April 2014. Section 1 will come into force on 1 August 2014.

The consultation also asked for views from the co-operative sector on six proposed primary changes to IPS legislation:

A raising of the limit on withdrawable share capital in an IPS from £20,000 to £100,000.
Introducing insolvency rescue procedures for IPSs, namely arrangements under the Companies Act 2006, company voluntary arrangements and administration procedures under the Insolvency Act 1986.
The introduction of insolvency procedures for Credit Unions along a similar model to that applied currently to building societies. The Government has decided to wait and see if this is needed over and above the measures set out in 2. above, so it is not proceeding with this at present.
IPS officers will be liable to investigation by the FCA in respect of improper or unlawful behaviour in IPSs as from 6 April 2014. This is intended to create a level of equality between the regulation of IPSs and companies, with the rationale that this will increase consumer confidence in the IPS sector.
Providing greater transparency in the IPS sector by providing for the inspection of the register of IPS members in a similar manner to that currently applied by the Companies Act 2006. Following concerns expressed by key stakeholders, the Government is not implementing this.
Optional electronic registration for new IPSs. This will be cheaper and faster than the current system to encourage the take up of the IPS structure, and brings the registration system in line with that for companies.

It has decided to proceed with numbers 1, 2, 4 and 6, as from 6 April 2014.

Co-operative and Community Benefit Societies Bill
A further strand to the reforms is the Co-operative and Community Benefit Societies Bill (the Bill), which received its third reading in the House of Commons on 17 March 2014 and is currently awaiting Royal Assent. This is a consolidation bill, aiming to bring together in one Act all the legislation relating to IPSs, in a similar way to how the Charities Act 2011 consolidated charity law. The Bill does not make any substantive changes to the existing law but it does seek to clarify ambiguities and inconsistencies in the overlapping Acts that it will replace.

One interesting point regarding charitable IPSs was made by Lord Hodgson (who was in charge of the Charities Act review) regarding the test for registration as a community benefit society. Clause 2 of the Bill states that a society can only be registered as a community benefit society if it is shown to the FCA’s satisfaction that its business is being, or is intended to be, conducted for the benefit of the community. Lord Hodgson was concerned that this might be a lower test than the public benefit test that an organisation must pass in order to be registered as a charity and that there is “a danger that the unscrupulous will game the system to take advantage of whichever regime is the laxer”. Charitable IPSs are exempt from registration with the Charity Commission and it seems that this exemption will continue as, although there has been talk of abolishing it, there is no mention of this in any of the reform documents).

Improving local government procurement

On 13 March 2014 the Communities and Local Government Committee of the House of Commons […]

On 13 March 2014 the Communities and Local Government Committee of the House of Commons published its report on local government procurement. This is the result of an inquiry which the Committee launched in July 2013 to look at how effective recent procurement reforms had been in improving local government procurement approaches, and the potential for further development. The inquiry focused on procurement in its widest sense, not simply the purchase of goods but also the wider commissioning of services and the management of contracts, including outsourcing of service delivery. These are some of the findings and recommendations.

Collaboration not centralization

The inquiry looked at whether local government would benefit from using a centralised procurement system like central government’s Crown Commercial Service. The view was that local authorities needed to retain local control over procurement, in order to best meet local needs. Some national arrangements, such as for energy purchase, might be beneficial, but local authorities should be able to enter these if they choose, not to be forced to.

On the other hand, the report sees value in local authorities adopting a collaborative approach to procurement. The number of shared procurement services doubled during 2011-12 with 75 councils now in 16 formal joint purchasing arrangements. On average, collaboration is estimated to be generating savings of 10-15 per cent. There is scope for much greater collaboration and the Local Government Association (LGA) is asked to conduct a review of collaborative approaches and produce best practice guidance.

Delivering strategic objectives, including social value
Procurement is a key route for councils to deliver their strategic objectives, including social, economic and environmental aims. The report looks at whether the Public Services (Social Value) Act 2012 has helped with this. It suggests that the Act might need extending so that it applies to all procurements, not just those that are above the EU threshold, particularly as the new EU Directives will increase this threshold meaning even fewer contracts are caught by the Act.

The report acknowledges that there is a judgment to be made by each council, and for each contract, as to the correct balance between letting a contract at the lowest price and requiring contractors to deliver additional economic and social value, sometimes at an additional cost. It recommends that all councils should present an annual report to full Council setting out their strategy for incorporating economic, social and environmental value in their procurement, and that the LGA should disseminate examples of best practice case studies and updated social value guidance to reflect the new procurement directives.

Reducing costs and bureaucracy

The report quotes some alarming figures. A typical procurement exercise for an above-threshold contract costs a bidder £40-£50,000. This might be worth it for high-value contracts, but 75 per cent. of all contracts tendered in the UK are below the threshold. However, councils still tend to apply the full rules to these below-threshold contracts, to be on the safe side, when there is no need. More guidance is needed.

Another alarming figure is the example quoted by the CBI of one construction company that spent an average of £8,000 on each pre-qualification questionnaire (PQQ), which, with 200 tenders a year, added up to £1.6 million on pre-qualification alone. The report agrees with the Government’s view that there should be a single, simplified PQQ for above-threshold contracts, but does not think that PQQs should be abolished altogether for lower-value contracts, as they can be useful to limit the number of bids an authority has to evaluate.

The report also recommends that contracts should require the contractor to pay its sub-contractors promptly, right down the supply chain.

Contract management

The inquiry heard evidence of many public sector outsourcings that had failed because councils had not managed risk effectively. The report notes that “it is self-evident that outsourcing of a contract does not mean outsourcing responsibility for ensuring the quality and consistency of service to residents”, but that there were regrettable examples where complex outsourcing arrangements had failed to safeguard service delivery and quality. It recommends that councils develop and support a culture that embeds appropriate risk management across the council, not just in the procurement team, as it is often at a later stage, once the contract is operational, that standards start to slip (for example, an unreasonably low initial price that allow suppliers to drive up the price at a later date).

Governance: fraud and transparency

The report raised concerns that the level of procurement fraud risk within local government would increase as a greater proportion of services are outsourced. The Committee said “It is not sufficient for councils to ‘let and forget’ contracts: rather close monitoring of their delivery is essential to detect potential fraud”. It calls on the Government to give support and guidance on the best ways to identify and tackle fraud.

There was also evidence that the outsourcing of public services can dilute transparency and disclosure requirements on suppliers, since private sector companies delivering public services were not automatically caught by the Freedom of Information Act. The report suggests that the requirements for contractors to publish information on performance delivery and contract costs should perhaps be extended, for example by including in contracts terms that mirror the regulatory requirements on public bodies to provide information. Local authorities should make greater use of open book accounting to improve procurement transparency.

Comment

This report does not tell us anything we didn’t already know but it is clear that it sees procurement as an activity that should be at the heart of local government not on the periphery: “procurement should not be seen as a niche function conducted in silos, rather as an activity central to delivering high value, cost-effective services to communities”. It does ask a lot of both central government and the LGA in terms of supporting local authorities in procurement so we will see how they react to these demands.

One final quote to end with, which perhaps sums up the Government’s approach to ‘localism’:

“Local government has a responsibility to show that it can put its own house in order. If it does not, we fear DCLG will opt for compulsion.”

Local Audit and Accountability Act under scrutiny

Shortly after coming into power in 2010, as part of its drive to reduce the […]

Shortly after coming into power in 2010, as part of its drive to reduce the number of public bodies and save taxpayers’ money, the Coalition Government announced its intention to close the Audit Commission. True to its word, the Government began stripping the Audit Commission of its powers, scrapping its inspections and outsourcing its contracts, and then introduced the Local Audit and Accountability Bill to Parliament in May 2013. See our previous article on the original Bill. The Bill was passed on 30 January 2014 and is beginning to take effect. Its main purpose is to put in place a new audit framework for local public bodies in England, but there are a number of other provisions, hidden away towards the end under ‘Miscellaneous’, which are arguably of greater interest.

The new audit framework
The legislation underpinning the existing audit regime, including the Audit Commission Act 1998, is repealed. Instead, local public bodies in England, such as county and district councils, fire and rescue authorities and clinical commissioning groups, will have to appoint their own independent auditors, similar to the audit requirements on companies and charities. The auditors will be regulated by the appropriate professional accountancy regulators, and the Financial Reporting Council will have overall supervision, mirroring the arrangements under the Companies Act 2006.

The scope of the audit itself will remain very similar to the current audit. Auditors will have to comply with a code of practice and have regard to guidance. The code and guidance are being developed by the National Audit Office.

The audit framework will be implemented through secondary legislation and a consultation on this ran during November and December 2013. The Government’s response was published in February and the Government is working towards having finalised regulations on: the appointment and removal of auditors and their eligibility; and the conduct of local audits, ready to be laid before Parliament in the summer. Further regulations on: smaller authorities; establishment of a sector-led body to procure/appoint local auditors; and Accounts and Audit regulations, will be laid later in 2014 following a further consultation to be issued in May.

Smaller authorities with an annual turnover not exceeding £25,000 are exempt from a routine external audit. Instead they will be subject to new transparency requirements. The Government is currently consulting on a draft transparency code for parish councils, which it intends will act as a substitute for an audit, allowing local electors to access the information about the parish council’s accounts and governance so that those electors can ‘audit’ the parish council.

Local Authority Publicity Code
Eric Pickles has long had a bee in his bonnet about what he has termed ‘Town Hall Pravdas’ and section 38 of the Act enables him to direct a particular local authority to comply with the Code of Practice on Local Authority Publicity, or to make an Order (by passing a statutory instrument) imposing a duty on all local authorities to comply with the Code. This is as predicted by our previous article, Further restrictions on local authority publicity?. These powers came into force on 30 March and a letter has already been written to all local authorities warning them that the Secretary of State is minded to give a direction to any authority he considers is not complying with the Code. At the same time, Brandon Lewis wrote to Greenwich, Hackney, Newham, Tower Hamlets, Waltham Forest and Nottingham saying that “it has been suggested that your council might not be complying with the Publicity Code” and further suggesting that “prior to the Secretary of State’s new powers coming on-stream at the end of March, you take steps to ensure that your council is in compete [sic] compliance with the provisions of the Code”. It will be interesting to see if they heed these warnings or whether any directions are issued..

Council meetings
Section 40 was inserted as the Bill passed through Parliament and came into force on 30 March 2014. It allows the Secretary of State to make regulations allowing council meetings to be filmed, recorded and tweeted live. The aim of this is to make meetings of full council and committee meetings, plus parish council meetings, fully accessible to those who cannot attend in person, so that there is transparency and openness and that decision makers can be held to account. The Government seems to have inserted this clause as a reaction to various councils ejecting members of the public who were trying to film meetings. We expect regulations to be published shortly.

Council tax referendums
The Localism Act 2011 enabled the Government to set a threshold for council tax increases each year. If a local authority wanted to increase its council tax about that threshold, it triggered a referendum. The calculation did not take levies into account. Levies are amounts that a local authority pays to an external body, such as a waste disposal authority or integrated transport authority, and then recharges to the council tax payer via the council tax. They have been steadily increasing more than other parts of the council tax bill; last year they increased by 5.2 per cent. Section 41 of the Local Audit and Accountability Act therefore amends the calculation of council tax to include levies. This took effect on 30 January, enabling the levies to be included in the 2014/15 calculations.

Comment
The Act has caused some controversy but perhaps not as much as expected. This is probably because many of the provisions need to be implemented by regulations, most of which have not yet been issued for consultation. It does seem, though, that more responsibility for scrutiny – of finances and meetings – is being passed to a local level. Is central Government washing its hands of local government, leaving the people to decide? And yet, it is seeking to exert more control over how local authorities can influence public opinion, by enforcing the Code of Practice on Local Authority Publicity. Local authorities will have to be open and transparent and let the facts and figures speak for themselves.

State Aid Latest Developments

All public bodies that are in a position to give resources to help businesses need […]

All public bodies that are in a position to give resources to help businesses need to know about state aid. State aid is when a local or national authority selectively grants public resources to an entity which is engaged in economic activity and provides that entity with an economic advantage.

The Treaty on the Functioning of the European Union states that state aid, in whatever form, which could distort competition and affect trade by favouring certain undertakings or the production of certain goods, is illegal. There are, however, exceptions to this rule. In certain circumstances, the Commission may formally approve aid measures within certain limits.

The reason why both public authorities and the recipients of aid need to be concerned is that the European Commission has powers to recover unlawful state aid. The consequences of giving such aid include:

firms may have to repay the State aid with interest
aid payments and schemes may be suspended
policies may have to be altered.

The rules around when aid is (or is not) state aid are complicated. The European Commission has since May 2012 been reviewing state aid rules and guidance, with the aims of: fostering growth in a competitive internal market; focusing scrutiny on cases with the biggest impact on the internal market; and streamlining the rules and providing for faster decisions.

Regulations
There are four main Regulations that underpin the state aid rules. We reported on the amendments to two of these, the Enabling Regulation and the Procedural Regulation, in our last Local Government review article. The other two are the General Block Exemption Regulation and the De Minimis Regulation.

General Block Exemption Regulation (GBER)
The GBER is a crucial part of state aid rules, as if aid falls within one of its categories, then it is exempt from being notified to the Commission (notification is normally necessary to gain approval of the aid). The Commission expects that about three-quarters of aid measures and two-third of all aid granted will be within the scope of the new GBER. It is not surprising that the Commission has been consulting on the drafting of the new GBER for some time and issued a third and final draft in December for consultation (which ended in February). The revised GBER significantly extends the exempted aid by providing higher notification thresholds and aid intensities in many areas, and by including a number of new categories of aid. The final GBER will come into force on 1 July 2014.

De Minimis Regulation
A revised De Minimis Regulation came into force on 1 January 2014. This exempts aid from being illegal state aid if it is below a minimum threshold. The maximum aid that can be granted is EUR 200,000 to a single undertaking over three years, but the definition of “single undertaking” has been clarified and the revised Regulation also includes loans, if they are at least 50 per cent. secured and no more than EUR 1 million over five years or EUR 500,000 over ten years.

The Notion of State Aid
Recently the Commission has gone back to basics and looked again at what state aid actually means: how do you define the different elements that make up state aid? The consultation has just closed so we will wait and see what the views are. Our article on the notion of state aid gives more information.

Guidelines
As well as regulations, state aid rules are made up of guidelines from the Commission that cover various sectors. As part of the State Aid Modernisation programme, the Commission is updating these guidelines. Some of the key ones are:

Energy and Environmental Aid
As predicted in this article on state intervention in the European electricity market, the final draft Guidelines on Energy and Environmental Aid that were published for consultation in December 2013 are based on the idea that support for renewable energy should be market-based wherever possible. Aid should be in the form of market premiums (supplements to the wholesale price) or tradable certificates, rather than fixed tariffs.

Specific measures covered in the Guidelines include investment aid for remediating contaminated sites, resource efficiency and waste management, and district heating and cooling.

Research & Development and Innovation
The new Framework will apply from 1 July 2014 and sets out how the Commission will assess aid for research and development and innovation (R&D&I) that falls outside the scope of the GBER. It establishes greater legal certainty for support for public-private R&D&I projects, in order to facilitate public/private R&D collaboration and knowledge transfer.

Rescue and restructuring
A revised draft of these Guidelines was published in November and expected to be adopted in the first half of 2014. The main proposals are a new concept of temporary restructuring support for SMEs in the form of loans or loan guarantees lasting no longer than 12 or 18 months; and better filters, to ensure that state aid is targeted at cases where it is really needed. For more information see this article.

Risk finance guidelines for investment in SMEs
These were adopted in January 2014 and will replace the existing Risk Capital Guidelines from 1 July 2014, until 31 December 2020. They apply to risk finance schemes, not ad hoc measures providing financial aid to individual undertakings. The new Guidelines are wider in scope than the previous ones, as they apply to aid measures in favour of small midcaps (up to 499 employees), innovative midcaps (up to 1500 employees and with R&D and innovation costs representing 10% of total operating costs) as well as SMEs (up to 250 employees). They apply to aid that is above EUR 15 million; aid below this will fall within the GBER. The types of aid that can be granted are wider, including loans and guarantees as well as equity.

Important projects of common European interest
The Commission published a draft Communication on important projects of common European interest (IPCEIs) in January 2014 and it is intended to take effect on 1 July 2014. Examples of IPCEIs are cross-border transport projects, energy infrastructure projects, research infrastructure or pan-European investments linked to the development of key enabling technologies. They often need public authorities to fund them as the market would not otherwise finance such projects. Such state support constitutes state aid.

At present, rules on state financing of some IPCEIs are contained in the current Guidance on R&D&I and environmental aid, but there is no separate document specifically covering all IPCEIs. As part of the State Aid Modernisation programme, the Commission has published this new Communication that brings all the rules relating to financing of IPCEIs together, updating, consolidating and extending the existing guidance.

Further information
This article merely summarises the latest developments in the State Aid Modernisation programme, without going into great detail. We are happy to provide you with more information on any of these areas which may be of particular interest to you. For more information please contact David Kilduff or Richard Auton.

Straying from the General Power of Competence

Those living in Yorkshire cannot have failed to notice that the Grand Depart of the […]

Those living in Yorkshire cannot have failed to notice that the Grand Depart of the Tour de France is beginning in God’s own county this summer. The finish of the first stage is in Harrogate, next to the Stray, a large open area of land in the middle of Harrogate. Use of the Stray is governed by the Harrogate Stray Act 1985. Harrogate Borough Council were concerned that the 1985 Act prevented or restricted them from siting necessary infrastructure on the Stray to host the Tour de France. So they wrote to the Secretary of State asking him to make an Order to disapply certain parts of the 1985 Act for 16 days so that they could section off a quarter of the Stray and erect temporary infrastructure.

Section 1 of the Localism Act 2011 gives councils a general power of competence to do anything that an individual can do. Section 5 of the Localism Act enables the Secretary of State to make an Order to amend, repeal, revoke or disapply any statutory provision that prevents or restricts councils from exercising the general power of competence, provided that certain conditions are met. This is the first time that this power has been used. It entailed a six-week consultation, including hand-delivering 500 letters to local residents and displaying posters on the Stray. This elicited a grand total of 14 responses. Six were in favour, six raised concerns, and the other two did not comment on issues raised in the consultation. Given that the Order will only apply for 16 days, for a specific purpose, and Harrogate Borough Council undertakes to restore the Stray to its original condition afterwards, the Secretary of State considered it appropriate to grant it. The draft Order is currently awaiting approval by Parliament.

So what does this mean for local authorities? Whilst it may seem like using a sledgehammer to crack a nut in this case, it was still easier and quicker to use the Section 5 Localism Act procedure than to amend the 1985 Act itself. The Localism Act contains conditions that must be satisfied before the Secretary of State can effectively overrule existing legislation in order for councils to be free to exercise the General Power of Competence. In this case the conditions were easily satisfied (although the procedure seems costly and long-winded) but one can see why they are necessary since in theory any statute can be overruled by this power. Now that Harrogate has been brave enough to set this precedent, we wait and see who will be next.

Transparency in outsourced contracts

The transparency agenda has been high on the Coalition Government’s list of priorities since it […]

The transparency agenda has been high on the Coalition Government’s list of priorities since it came to power four years ago. However, in those four years there has been significant outsourcing of public functions, not all without controversy. Recently, concerns have been voiced that it is difficult to find out what has been going on in these outsourced contracts – until it is too late.

Public functions that are carried on in-house are subject to the Freedom of Information Act (FOIA), so in theory (unless an exemption applies), anyone can find out information about how those functions are carried out. When those functions are outsourced to a private company, the position is less clear. The FOIA applies to information held by a public authority or “by another person on behalf of the authority” (section 3 (2) (b). But it is not always easy to tell when a contractor is holding information on behalf of a public authority (which would be subject to the FOIA) or on its own behalf (which would not be). A recent ICO blog gives an example of a local authority contracting out the management of a leisure centre to a private company, and whether information about the number of people using the gym was the company’s information, or the authority’s. If the former, then there would be no way that a member of the public could compare usage of the gym before and after the contracting-out.

The Information Commissioner’s Office (ICO) is concerned that “if significant information about the operation and delivery of public services is no longer covered [by the FOIA], then we are witnessing a gradual reduction of the scope of FOIA”, with the risk of corresponding reductions in transparency, efficiency and public trust.

There are two obvious ways that the Government could address this. The first is to designate private contractors who provide public services under a contract with a public authority, as public authorities under section 5 FOIA. However, this seems to have been discounted as being too complicated.

The second way, and the one the Government is proceeding with, is to publish a revised code of practice to make sure that freedom of information clauses are put into all public sector outsourcing contracts. The aim is to have this in place by the end of 2014. The ICO have been asking for examples of contract terms relevant to FOIA, both good and bad, and of how public authorities are working successfully with private sector providers.

The new clauses will need to carefully define who ‘holds’ information for the purposes of FOIA and also be more consistent, promoting real partnership working rather than the often overly-cautious approach adopted to date.

Until the new clauses are published, we advise that freedom of information and transparency clauses in contracts with the private sector are carefully drafted to make clear what information is being held by the contractor on the authority’s behalf, and must therefore be disclosed in response to an FOIA request, and place the onus on the contractor to work with the authority to be as transparent as possible.